Reset to Today

To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004.

Content Options:

Content Options

View Options:

Alternative versions

  1. Point in time
    2005-12-30

SIFA 9.10 Assessing your customer's understanding of risk

SIFA 9.10.1G

When you conduct investment business for private customers, you must ensure that you take reasonable steps to ensure that they understand the nature of the risks involved with the transaction (COB 5.4.3 R).

Why do you have to assess your customer's understanding of risk?

SIFA 9.10.2G

Assessing attitude to risk is a fundamental part of the 'know your customer' process and of suitability. You will want to recommend products or services that are suitable for your client's risk profile. This is so that they are happy with the service you have provided.

SIFA 9.10.3G

Assessing your customers' understanding of risk will help ensure that you meet the requirements set out in the following Principles:

  • Principle 7 (Communications with clients) requires you to pay due regard to the information needs of your clients and to communicate information to them in a clear, fair and not misleading way.
  • Principle 9 (Customers: relationships of trust) requires you to take reasonable care to establish the suitability of advice that you give.

SIFA 9.10.4G

You must establish what each client considers an acceptable level of risk to be for them and advise them on that basis. When you have a clear understanding of your client's attitude to risk (i.e. whether they are risk averse or willing to take some degree of risk) you will be in a better position to recommend suitable products.

Where is the relevant section in the Handbook?

SIFA 9.10.5G

The requirements for assessing your customers' understanding of risk and providing risk warnings are set out in COB 5.4.

SIFA 9.10.6G

COB 5.4 refers to the requirement for an adviser to assess a private customer's understanding of risk for any personal recommendation (COB 5.4.3 R). Special risk warnings apply in addition for:

SIFA 9.10.7G

A firm has a general duty to ensure that it has taken reasonable steps to ensure that its private customers understand the risks involved with any investment product that the firm recommends to them (COB 5.4.3 R) and, similarly, with the risks involved in mortgage and/or general insurance products.

Other considerations

SIFA 9.10.8G

Your client may have different attitudes to risk for different products. You should not assume they would have the same attitude to risk for all their financial planning needs.

SIFA 9.10.9G

COB Section 5.4 does not apply if you are providing basic advice on a stakeholder product - see COB 5A and Chapter 9.17 of the Guide.

The following sections are also relevant:

'Clear, fair and not misleading' - Chapter 9.2

'Know your customer' - Chapter 9.8

'Suitability' - Chapter 9.9

PRIN 2.1 in the Handbook

If you do mortgage or general insurance business you should also refer to MOGI 2 and GIGI 3.